A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment.
It
is a type of mutual fund that invests other mutual fund schemes rather than
investing in securities, stocks and bonds. Fund of Funds invests money in
mutual funds offered by other asset management companies. It is a type of
investment strategy wherein money is invested in other investment companies
rather than investing directly in securities and bonds. It is also called as
"multi-manager investment". Funds can be invested in the home asset
management company or other external companies. The investor has a portfolio
comprising of units of other mutual fund schemes. It is just like a
conventional mutual fund which maintains a portfolio consisting a blend of
equity, debt and money market instruments or non-financial assets.
Fund of funds provide investors with an added
advantage of diversifying investment into different mutual fund schemes even
with a small of investment. This further helps in diversification of risks in
investment. However, fund of funds comes with a high expense rate as the cost
of investment with different mutual funds scheme is high when added up
together.
Features
of Fund of Funds
Below listed are some of the significant features of the Fund of Funds
- It is a type of a collective investment scheme which provides
investors with varied options to invest their funds.
- These funds offer diversification of investment.
- It reduces volatility of funds and produces average return on
investment.
- The fund manager thrives to invest money in the best performing
funds of the mutual fund market.
- It becomes easy to keep a track on the funds as there is only one
fund that further invests into other mutual funds.
- An investment in Fund of funds requires adequate knowledge of stock market and expertise. So consulting a fund manager becomes mandatory. It also adds up to the total cost of investment.
Advantages
of Fund of Funds
An investment in Fund of fund can be advantageous to the investor and the fund managers in the followings ways.
Advantages
to the investors
Some of the advantages that an investor is likely to have after investing their funds in Fund of Funds are as follows:
- The investor has access to make investment in funds
that are not easily available for retail investment.
- Fund of Funds offers the biggest advantage of
investing funds in only fund, but yet make investment in various
different funds available in the market i.e., your investment is
diversified.
- The risk of investment is lowered because of diverse
investment in funds. So the performance of the non-performing stock will
not hamper the money-making ability of your portfolio.
- These funds do not compel an investor to make huge
amount of investment. An investor can happily invest even with a small
amount of money.
- The investment is made in various types of hedge
funds which increases the potential of higher returns.
- A skilled manager thrives to capture the best
performing funds in the market which eventually strengthens your
portfolio and increases the chances of high return on investment.
Disadvantages
of Fund of Funds
We all know that investments in mutual funds and stocks are subject to market risks. All the mutual fund investments will have some pros and cons by default. Here is a list of some of the disadvantages of investing in Fund of Funds.
- Fund of funds investments come with higher administrative and consultant
fees be it a broker, a banker or a consultant. These fund managers earn
huge amount of income in the form of consultancy fees. The fees are so
high that there is a joke about this type of mutual fund in the industry.
Hence, this fund is also known as "fees of fees funds" in a
jovial way.
- This type of mutual fund comes with limited redemption facility. It
simply means that the investor is unlikely to redeem his/her investment
into liquid cash whenever he/she wishes. This fund has "gates"
and "lock-ups" on the fund invested. These are a financial term
which in simple terms means limitations levied on the investor which
restricts him/her to withdraw cash from the market.
- Fund of funds has a very complex form of tax structure. The investor
has to pay taxes on the capital gain even if they recover it in the form
of cash. This again adds one more layer to the total cost of investment in
the fund.
- Transparency of information is important in this type of investment.
So wisely appoint a fund manager for your investment. It is your
responsibility to keep yourself updated about the stock market and the
fund manager. Make sure that your fund manager does not take undue
advantage of your investment.
An investment
in Fund of Funds is a good way of entering into the world of mutual fund
investment if you are an amateur investor. These funds do not require much of
investment and expert knowledge. Over the past 10 years, it is seen that more
people are seeking interest in investing in Fund of funds. The increasing investment
has lead to faster growth of asset managed under these funds. The rapid
economical changes has attracted a lot of traffic for this type of mutual fund
investment as it provides security.